Lauren Templeton and Scott Phillips, coauthors of Investing the Templeton Way, will provide their analysis on John Templeton’s Buena Vista speech on the economic vices and virtues in upcoming posts. Please consider entering our contest on this topic for a chance to win $500.
As we know, this behavior of utilizing debt to live beyond one’s means strained the balance sheets of the households and the financial intermediaries that facilitated the behavior to the point of nearly toppling the financial system itself. In the wake of investment bank failures such as Lehman Brothers, and the de facto failures of the remaining investment banks such as Merrill Lynch, the U.S. government implemented a form of wealth redistribution by infusing public taxpayer money into these firm’s balance sheets to ensure their survival (TARP). In doing so, the government transferred liabilities from these indebted firms to the U.S. taxpayer. When the government ostensibly rewarded these firms for their risk taking by allowing them to survive, they committed a highly visible act of envy by forcibly reallocating resources that the firms dearly sought, but had no right to obtain.
Many pundits correctly warned of an ensuing “moral hazard” that would develop, where irresponsible firms may come to believe that their behavior is acceptable since the government will ensure their survival. This is one good example of what Sir John referred to in his discussion of the evils of envy since “envy can blur the boundaries of private property . . . when the boundaries of private property are gone, so too go many of the moral rules of society . . . the social conscience is affected, and vice becomes more generally practiced.” We must acknowledge that the redistribution of taxpayer money to irresponsible firms set a precedent for this economic vice to become more generally practiced.